Agreed. Major difference being home mortgages can be refinanced or terminated for a lot of non financial reasons. The vast majority of bonds are called because of lower interest rates, the exact worst moment for an income investor to reinvest.
For me and my spouse.
I own my home but I didnāt include it here. I should have said $3 million in investable income would get me $120k a year. Thank you for pointing that out as many/most donāt own their home outright.
I buy munis with long call protection - like 8 years plus. And 4% is historically not high. And I always check pricing on EMMA to ensure Iām at the right price. Schwab doesnāt have markups (other than $1 per thousand) so their pricing is usually better than others.
If I had a mortgage -letās say $2500 a month (excluding escrow), for me Iād still be ok but again everyone is different.
But I just guessed at a #. Fortunately thatās not my #.
The big thing, for me (not everyone) is income. Others like a larger net worth. But if they donāt have the income theyāll have to sell their principal.
I never want to have to sell principal.
2 Likes
If the principal grows additionally by x% instead of having an x% dividend or interest, does it really matter whether you have to sell principal versus collect dividend or interest? While the latter can be more passive (i.e. less active management), the former can have some advantages with respect to income taxes.
1 Like
Municipal Bond yields out the maturity curve are currently at or near their highs in the last 10 years. Rates will likely be trending lower in the not to distant future as the Fed has started to ease rates.
When I get closer my plan is to take a hard look at actual yearly expenses over a few years and planning on having enough of a nest egg (on top of SS and a small pension) to cover it. I figure a yearly 4% withdrawal from my nest egg will be doable and sustainable. I already have a ballpark based on my current spending but know this will shift a bit once retired. This gives me a good goal to work towards.
6 Likes
For me it matters. If Iām selling off principal, then Iāll have less to invest and consequently less income.
Most bonds have a pre set call date so if I buy one like I did a few weeks back with a 10/1/34 call date, it cannot be called.
No one knows if interest rates will be higher or lower then.
I have calls from both Illinois General Obligation and NJ Transport next month. Most is at 5% and some at 4.25%. The 4.25% can be equated today but I will need to buy āadditionalā to make up for the 5% bond. And it just so happens that because I have excess income, Iāll make that happen. In other words, if I have $100k at 5% and it now becomes 4.25%, then I need to buy enough to generate $750 more to break even.
That said Iāve had the 5% bond for more than a decade and paid less than par.
There can be naysayers or those who have esoteric products with high fees.
My style is to buy what I know. Others may do differently and if thatās ok for them, then great.
The main difference from a mortgage refi and bond call is that you can refi a mortgage anytime. Most bonds have pre set times. If theyāre callable anytime, I stay away. I seek call protection.
But I sleep very well at night. And for me, thatās what matters. Iām not looking to become Gates or Bezos - just comfortable and able to support generations to come.
3 Likes
Not necessarily as the 10 year has risen since the fed started cutting.
Right now you can buy good 4% paper at 95 and 4.25 at 99+. This is high rated stuff. You can go BBB for less and you are still investment grade.
Go further back and 5% was the norm.
I get it - itās not the strategy for you.
I took some lumps when rates were 3% and the feds did the unfathomable and allowed Puerto Rico to default which was against the law - but Iāve done this over 30+ years and amped up the strategy when I was heavy in equities and my nerves could not handle the volatility.
I invest like an old person and I invest as the wealthy do - and for me it works. The wealthy including billionaires are heavy muni buyers.
There is infjation risk too - if itās 9% and I earn 4% - right. Thatās why Iām always buying more each year to ensure my income exceeds my expenses even if I lose purchasing power.
Thanks
Once again for the awareness of those unfamiliar with how callable municipal bonds work.
Once a municipal bond reaches its first call date (typically 10 years) , it is generally considered ācontinuously callable,ā meaning the issuer can redeem it at any time until its maturity date, essentially making it callable at any point after the initial call date.
This means an income investor will be exposed to significant decreases in reinvestment income for the 20 plus years post first call date.
2 Likes
There are a LOT of ways to skin the retirement income cat. We have a very diversified portfolio and that works for us. We do not have any annuities. Personal choice. I know this works for others.
DH is far less risk adverse than I am so his portfolio is different than mine. And thatās OK too.
4 Likes
If the FA is a fiduciary he is supposed to act in the best interest of the investor/client.
We donāt like bonds and we donāt have pensions. DHās company was sold about 15 years before retirement, and those high income years would have increased the pension ā he got a payout from the earlier companies that had pensions.
Having the pensions IMHO allows you to have more heavily stock diversified savings, because the pension lowers your overall financial risk.
We have a cash stream from our purchased annuities - which we have the max payout every month which starts a year after the annuity is established.
I liked the WSJ article. It is interesting that they are seeking input on people retiring at or before age 55. I think they showed some variety with people across the country, people that had some personal setbacks (cancer, divorce, work place folding).
We know people that spend a good sum every year with travel, but they have the money for it.
DH traveled with work nationally and internationally. He has stories about travel, and that is about all he wishes to do with travel now. We are with the grandkids now out-of-state, and the commotion has him putting his noise-cancelling headphones on LOL.
I have been retired now 3 years (but was SAHM and cancer survivor for 18 years before sunset career working as a RN/BSN, but well below qualifications with two graduate business degrees - it just made the easiest way to re-enter the job market with meaningful work) - working as admission nurse in rehab, and second shift skilled care. It has my eyes wide open on how important it is to be cautious/careful with avoiding common accidents. DH went out walking last January when it was icy/roads closed (AMA or as I say AWA against wife advice or wise advice), and he broke his leg - fortunately he did not need surgery but was a wake up call to think about careful/caution.
Our stock funds have done well in recent years, and when the stock funds get too big, we purchase an annuity if it is a good time to purchase such - we have annuities that range in maturity from 6 - 12 years. We just replaced 10 year maturing annuities with other 10 year annuities with another insurance company.
DH retired at 64 1/2 - his boss was a pill and for DHās emotional health it was worthwhile to retire ā and he saw we had plenty in retirement funds. I was able to carry our health insurance with my sunset job, and we avoided paying higher cost with COBRA. I turned 65 4 months after DH.
2 Likes
I think health insurance costs and getting out of oneās career as early as 55 causes someone to either save vigorously to do so, or have thrifty retirement.
BIL retired before 65 because his older wife was spending the entire summer months more remote at their 2nd place (extra large RV that is permanently docked), and he felt he was missing out too much time with her. Last summer, he took a PT job at an outdoor outfitter place to earn a little extra money, to mix with other people (the RV is at a rather remote place where you donāt get good reception for electronics, so BIL said it was getting boring there). BIL sold out his share of an inherited house so he could pay for his health insurance until he qualifies for Medicare.
1 Like
For those with pensions, how concerned are you about the possibility of the pension being underfunded?
Social Security and Medicare may also be of concern in that taxes may not longer be enough to cover payouts.
1 Like
This is why having a diversified retirement portfolio is important. And little to no debt. That can make a difference as well.
I canāt worry about the things for which I have no control.
5 Likes
and youād no longer have $10m in the S&P500, as the NAV will have dropped the same amount.
Finance 101 says you should be indifferent to holding equities that donāt pay a dividend vs holding equities that pay a dividend. In fact, teh former can be more tax efficient as dividends are taxed as income, and you donāt have any control on their timing. Instead, its the total Growth that counts.
So, using your example, you dividend āincomeā from teh S&P is actually just a reduction (aka distribution) in capital.
M&M won the Nobel prize for their work on this.
5 Likes
Iām concerned, but it doesnāt keep me up at night.
As I said, I check the financials yearly and have not seen anything suspect, but this is a company in a dying industry so thatās in the back of my mind. But they always were an amazing employer, family-owned when i worked there. We had excellent benefits. I have faith that they wouldnāt screw us over, but, truthfully, now that I understand finances much better than I did in 2019, if I were to be offered another lump-sum offer I would take a hard look at it and seriously consider it. I like the idea of having the money in my hand.
2 Likes
Iām not. I had two. My old company isnāt doing well but the pension was funded. I took the buyout because it seemed the better deal.
A defined benefit pension is really icing on the cake in my mind. Itās not why I worked at the company.
As to @SOSConcern, I donāt use an advisor. To pay, most of them .8 to 1% of assets just isnāt for me. Thatās a big chunk of a likely return.
In my case, my bond income is an annuity and yes my 401k and some extra savings go into equities with the S&P being about 2/3 of my 401k contribution.
Iām not a fan of annuities myself because - mist annuities have high fees and if you have a life annuity, your money disappears when you do. I donāt understand them but my brother in law got hoodwinked into one (maybe variable) and heās stuck - the cash value is less than the value and Fidelity has told him not to sell but yea heās paying onerous fees. Heās gone to them to get out if it. In essence, he bought what he didnāt understand.
Even if one has professional help, they should understand what they purchase.
So it goes back to - we all have different strategies and as long as one is happy with their choice, nothing else really matters.
Yes but we are talking about retirement - and one needs to eat so a non dividend equity does not help you do that.
Also, historically, and Iāll have to find the time reference but 37% of S&P return comes from dividends.
In the end, in retirement you need income. When I buy equities, I buy with dividends. Some like IBM double. Others have fallen or stayed static.
But again Iām conservative. Iām an income seeking investor. Others may not be.
By the way, the NAV is of a fund - my example was individual stocks.
However, if the pension is underfunded, you can plan with the assumption of a smaller pension than promised in case it is unable to meet its promises.
The same could apply to Social Security and Medicare.
4 Likes
The math is the math. You can collect $111k in dividends (in your previous example) and pay tax at income tax rates, or you can sell $111k in your non-dividend equities and pay cap gains. Financially, there is zero difference, other than cap gains can be lower than income tax rates.
1 Like
Both my husband and I were federal employees, and we think our pensions are about as safe as they can be. (We are not the āoldā/better pension federal employees). However, we do realize the new administration is not friendly to federal employees, and we do worry about things they can push, such as eliminating the COLA associated with our pensions.
6 Likes